WTO Blows Tradewinds Between Taiwan and
China

China's widely heralded entry into the World Trade Organization last week eclipsed Taiwan's own admission to the multilateral organization. Yet there are high hopes about increased trade between the two, and whispers of greater trade may even hasten reunification of China and Taiwan, which the former regards as a breakaway province.

Already, Taiwanese companies have invested an estimated $60 billion or so in the mainland -- in garment and shoe companies, and in some electronics assembly. Yet they've needed to invest through offshore vehicles. Ahead of last week's talks in Qatar, Taiwan lifted restrictions on direct investment in China, including a $30 million cap on investments, and Taiwanese banks are now allowed to move money to and from Mainland banks. Removal of the investment cap also lets Taiwanese companies make big tech investments, which require bigger cash outlays.

Taiwan's market has sprung higher of late, with the Taiwan Weighted index up sharply since its October 3 low. The MSCI Taiwan index advanced 11% in October. So far this year, the Taiex is down nearly 10% in dollar terms, while China "B" shares are up 70% plus. Meanwhile, China will eliminate quotas, cut duties, and lift its own investment caps and other restrictions.

Taiwan's lifting of investment limitations wasn't simply preparation for WTO, under which it would need to boost trade with China. The island nation also recognizes China's competitive advantages, including a huge domestic market and a cheap, stable labor force from which it can export to the rest of the globe. Foreign direct investment in China, now running at around $60 billion annually, is expected to jump to $75 billion or so within a couple of years.

Says Hong Lu, the chief executive of Alameda, California-based
UTStarcom,
which sells telecommunications switches and equipment to service providers in China and Taiwan: "WTO is great news for us. There has to be more trade between the two! And now that both are in WTO, there's good potential, maybe as soon as next year, that we'll have things like direct air links between Taiwan and China."

Lu continues: "In China, it will allow other investors to invest in operators, like
Verizon
and so forth. More cash will be available for operators, and they will buy more equipment." And part of the increased competition means China will also relax restrictions on UTStarcom's own operations. As recently as last year, UTStarcom couldn't sell equipment to providers in larger cities, and Lu expects that to change.

And with Taiwan, says Lu, "It's good news. There has to be more trade!"

Says Albert King, the lead manager of
Taiwan Fund
: The idea of reunification "becomes more real."

Make no mistake, it won't all be sweet. Some worry that China, an exporting powerhouse, will create tough times for its neighbors. Says Warren Bailey, a management professor at Cornell University and an Asia expert: "Once China gets into the WTO, it will generate 50%-75% of all complaints. It will be a big mess."

For the past year, with China's WTO accession imminent, the rest of Asia has been shuddering. Japan, for example, is expected to benefit if it invests quickly and swiftly moves production offshore. China, of course, is expected to lure the largest share of foreign investment.

China is a rare bright spot of growth in the world just now, and restructuring is likely to shave that growth. Nobody has quantified just how bad things will be. Yet Joe Quinlan, the global economist at Morgan Stanley Dean Witter, notes that the flood of foreign investment will create jobs.

Yet Taiwan still faces a number of thorny problems. The country is undergoing a massive recession. What's more, President Chen Shui-Bian, leader of the ruling Democratic Progressive Party, still remains opposed to negotiating on any points of the "One-China" platform that China insists Taiwan accept. He'd like an economic alliance, while maintaining the political status quo. Taiwan, incidentally, enters WTO as a "customs territory" of China, just as Hong Kong, another "customs territory" is also a full member of WTO.

That's why so many believe that WTO accession for both countries will only worsen the cross-Strait tensions. Yadong Liu, managing director at Medley Global Advisors, says that "there are very high expectations that WTO accession by both will resolve some of the political issues in the Strait relations or help Taiwan to get around some of them to advance economic relations. But I think there is less truth than people realize."

To a large degree, says Liu, hopes of increased trade are "hyped up by the Taipei government" to put pressure on Mainland China. "They want to say that WTO is about trade, and whatever barriers there are, you should lower them. If we can, we should resolve political issues, but if we can't, we should shelve them and start trading. Of course, that's not what Beijing wants." Still, Liu adds, Chinese President Jiang Zemin has just one year left in office, and wants to leave a legacy. Says Liu: "If he can get Taipei to sign up on this one China concept, his legacy will be that he's locked China into agreement."

Lack of a political agreement, says Liu, could lead to discrimination against Taiwanese companies. And Taiwan, he suspects, may start pressuring other WTO members to put pressure on Beijing. "They'll say, we are both members, but we can't trade and accuse Beijing of violating the WTO agreement. With all these political problems, it's hard to imagine any major strides in economic and trade ties. You will hear more complaints about China from Taiwan."

Yet clearly, economic links between the two have prospered even as the political relationship deteriorated. Albert King of the Taiwan Fund is keeping a close watch on the coming yearend legislative elections to see if political leaders will take steps to improve the political relationship as a way of bolstering the economic ties. Says King: "The DPP and its management of the economic crisis have really alienated voters. People want a more liberal environment to invest and do business with China. After WTO, China will attract a lot of capital. China will be less dependent on Taiwan capital. But Taiwan becomes even more dependent on China as an important market. Beijing will just sit and wait. Politicians are really ignorant of the economic quandary." The best solution, says King, is a consensus on the "One Country" issue.

King and his comanager, Pedro Tai, think Taiwan's trading range will be little changed in coming months, owing to softness in global demand, weak U.S. corporate profits, high real interest rates, and continued concerns about bad loans in Taiwan's financial institutions. Yet demand is clearly getting better in some key sectors, including wireless and networking-related products, video conferencing, PCs, games, and so on. Foreigners continue to plow money into Taiwan, even as domestic investors remain wary. They're betting heavily on electronics, PC and peripherals, but are underexposed to semiconductors. (Not so tough to do, given that chips make up an enormous proportion of Taiwan's indexes.) Among their largest positions are
Mediatek,
which makes CD-ROMs and chipsets and is a former subsidiary of United Microelectronics, the world's second-largest chip foundry,
Taiwan Semiconductor Manufacturing,
and
Faraday Technology,
another maker of integrated circuits.

Says Fang Zheng, a China specialist for J.P. Morgan Fleming Asset Management: "Politically we don't expect reunification will happen tomorrow or in the near future. What we're focusing on is economic integration. At some point will it be one big economy? It's already there. The risk premium attached to Taiwan stocks will come down."

Zheng is investing in WTO through what he calls "T" shares: Taiwanese companies with more than 50% of assets in the mainland. Incidentally, these make up about a third of Taiwan's listed universe. They're cheap, he notes, and Taiwan companies have better corporate governance, product leadership, accounting, and flexible manufacturing capability than their mainland counterparts.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.